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Effects of monetary policy shocks across time and across sectors

  • Ekaterina V. Peneva
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    Recent empirical research by Olivei and Tenreyro (2007) demonstrates that the effect of monetary policy shocks on output and prices depends on the shock's timing: In the United States, a monetary policy shock that takes place in the first half of the year has a larger effect on output than on prices, while the opposite is true in the second half of the year. Olivei and Tenreyro argue that this finding reflects the fact that a greater fraction of wage rates are re-contracted in the second half of the year, implying that wages (and prices) are less flexible in the first half. In this paper, I assess this explanation in light of several additional empirical results. Most importantly, I demonstrate that within-year differences in the responses of output and prices following a monetary policy shock are not more pronounced in the service-producing sector, where labor costs represent a larger fraction of total production costs. I also find that movements in prices following a monetary shock tend to lead wage changes. These and other empirical results suggest that something other than uneven wage adjustment might be responsible for the differential within-year effect of monetary policy shocks that Olivei and Tenreyro document.

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    Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 2013-70.

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    Date of creation: 2013
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    Handle: RePEc:fip:fedgfe:2013-70
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    1. Giovanni Olivei & Silvana Tenreyro, 2006. "The timing of monetary policy shocks," LSE Research Online Documents on Economics 3742, London School of Economics and Political Science, LSE Library.
    2. Giovanni Olivei & Silvana Tenreyro, 2008. "Wage Setting Patterns and Monetary Policy: International Evidence," CEP Discussion Papers dp0872, Centre for Economic Performance, LSE.
    3. Sims, Christopher A, 1980. "Macroeconomics and Reality," Econometrica, Econometric Society, vol. 48(1), pages 1-48, January.
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